The UK could be facing a lost decade as the economy emerges from the recession.
The Monetary Policy Roundtable, made up of economists from the Bank of England and the Centre for Economic Policy Research, says it may take as long as eight years for the economy to return to full health.
Some members warn that consumers could be averse to borrowing and seek to reduce their debts.
The minutes of the meeting held in December said: “Participants pointed to previous episodes of significant balance sheet restructuring in Japan, Sweden and Thailand which had lasted around six to eight years.”
Other participants disagreed that the slump would be so severe.
The minutes say: “A recovery in the supply of mortgage credit would be likely to lead to a reduction in the savings rate and hence slow the delev-eraging process. That, however, would also take time the banking system remained significantly impaired.”
The roundtable also warned that the pre-Budget report contained “little news about the timing, composition and extent of any further consolidation in the public finances”.
Separately, Morgan Stanley senior economic consultant Charles Goodheart says the Government needs to move faster with plans for debt reduction as the UK’s coffers are currently on a “knife-edge equilibrium” between the economy’s nominal growth rate and the interest rate on the public debt.
He says: “If investors fear that the debt dynamics are unstable, they will demand higher yields for buying and holding Government debt. That itself will push up the interest rate paid on the debt, forming something of a self-fulfilling prophecy.”